ACCC denies authorisation for API - Sigma merger

12 September 2002

The Australian Competition and Consumer Commission has decided to decline authorisation(*) to API and Sigma for their proposed merger as there is insufficient public benefit to outweigh the harm to competition, ACCC Chairman, Professor Allan Fels, said today.

The merger would create a company with 60 per cent of the pharmaceutical wholesaling market in NSW, Victoria and Queensland and more than 50 per cent in other States. With Mayne, the only other major wholesaler, it would account for almost 90 per cent of the market.

The scope for parallel conduct between the merged entity and Mayne would be significant. Over time, the real possibility of decreased service levels and higher prices to pharmacists exists. There is the very real danger that this could be transferred and passed on to consumers in the form of higher medicine prices in some instances.

Loyalty arrangements, such as banner groups and financial guarantees for pharmacists, which effectively tie pharmacists to wholesalers, limit the likelihood of entry by new competitors into the market.

The deterioration in competitive pressures as a result of the merger would be a major public detriment.

API/Sigma claimed there would be benefits from the merger that outweigh any detriment. The ACCC accepted that there would be some public benefit, but these are not sufficient to outweigh the detriment.

API/Sigma claimed that efficiency gains worth $20 million a year would flow from the merger. This is on a combined revenue base of $3,500 million. The ACCC accepted that efficiency gains were likely, but considered that they may be offset by the reduced efficiency that goes with a slackening of competitive pressure on the firm. In addition, they would flow to the company and its shareholders rather than the community through lower prices.

API/Sigma also claimed that the merger would ensure continued community access to pharmaceuticals, enhance community health services, help it provide small business support, reduce Commonwealth expenditure on the Pharmaceutical Benefits Scheme (PBS), and enhance the export potential of its pharmaceutical manufacturing. The ACCC found that either these benefits were likely to occur in any event, or were of relatively modest sizes. Some claimed public benefits were not accepted by the ACCC because the parties failed to substantiate them in a meaningful way.

API/Sigma also claimed that the Commonwealth, through the PBS, constrains prices for 70 per cent of what it sells. The ACCC found that the merged entity had scope to increase its wholesaling margin by almost 40 per cent (from the current seven per cent to the allowable ten per cent) under the existing PBS arrangements. Further, there are no Government price constraints on the other 30 per cent of the sales made by API/Sigma – around $1,000 million worth. This is particularly important for those products that are available in pharmacies only such as cold/flu remedies and allergy treatments, which amount to about half of this amount.

The applicants provided the ACCC with a possible Undertaking to address key competition concerns. The Undertaking would have guaranteed certain service levels for five years and pricing levels for PBS products for two years. The ACCC was not satisfied that they were sufficient as they did not prevent the reduced competition and the potential impact on price and quality. The service levels specified in the Undertaking were less than the combined level of service provided by API and Sigma now.

The ACCC received over 120 submissions from a diverse range of interested parties including pharmacists, pharmaceutical manufacturers, pharmaceutical wholesalers, logistics providers, financial analysts and Government agencies. There was considerable diversity of opinion over the potential consequences of the merger. A majority of the submissions from individual pharmacists supported the merger while a majority of submissions from non-pharmacists opposed the merger.

(*) Authorisation is a process whereby the ACCC, in response to an application, can grant immunity from court action for arrangements or conduct which might otherwise be in breach of the Trade Practices Act 1974. To grant authorisation for a merger the ACCC must be satisfied, in all the circumstances, that the proposed acquisition would result, or be likely to result, is such a benefit to the public that it should be allowed to take place.